Is Tesla Stock Overrated or Underrated?

TSLA Stock at the Fork in the Road
iStock/JasonDoiy

TSLA Stock at the Fork in the Road

Tesla Inc (NASDAQ:TSLA) recently held one of the weirdest, most memorable earnings calls of all time. I didn’t write about it when it happened, because everyone else was doing that.

But the dust has finally settled. We finally have the distance and perspective to ask: Why did that Tesla earnings call go so badly? And does it mean that Tesla stock is overrated?

Let’s find out.

Tesla stock is currently trading at around $282.90. It is down more than 27% from its 52-week high, in part because of financial issues, but more importantly because “Model 3” production is running behind schedule.

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Chart courtesy of StockCharts.com

This downward trend sets the stage for some serious drama.

It has turned Tesla stock, once the darling of Wall Street, into a high-value target for short-sellers. More than a quarter of tradable shares are currently going short.

Put another way, the TSLA stock price is hanging by a thread. Every downward price movement adds more shares to the supply side of the equation, forcing the next tranche of short-sellers to dump their shares, and so on and so on.

Does this mean you should abandon Tesla stock? Not necessarily.

Before I expand on that Tesla stock forecast, it’s important for us to review the now infamous Tesla Q1 earnings call and the quarterly report it followed.

Tesla Q1 Earnings Call

The call took place after Tesla’s first-quarter earnings. Words to describe it range from “weird” and “unusual” to “bonkers” and “bizarre.” (Source: “Elon Musk’s Most Dumbfounding Moments on Tesla’s Earnings Call,” Bloomberg, May 2, 2018.)

One minute analysts were asking questions, the next Elon Musk was insulting them.

For example, in response to a question about Tesla’s capital expenditure, Musk said: “Excuse me…Boring, bonehead questions are not cool. Next?”

Another analyst then asked him about Model 3 customizations (personalizing the car makes it more expensive for Tesla, thus lowering the profitability). Again, Musk refused to answer. “Sorry,” he said. “These questions are so dry. They’re killing me.”

Crazy as it might sound, Musk then stopped taking questions from respected analysts. He gave the floor to a YouTube host, who asked broad, “cool” questions about driverless taxis and battery technology.

Tesla shares dipped immediately after the earnings call. To investors, it looked like Musk was either: a) childish, at best, or b) suspiciously irresponsible, at worst.

Although he later apologized for the abruptness, the bleeding continues—Tesla’s share price continues to fall. But maybe Elon Musk’s bizarre behavior isn’t to blame; it’s not as if the earnings report was anything great.

Tesla Q1 Earnings Report

Here’s what the numbers say.

  • Tesla lost $784.6 million in the first three months of 2018.
  • Tesla reached peak capacity at 2,270 Model 3s per week.
  • Capital expenditure reduced from $3.4 billion to $3.0 billion

(Source: “Tesla First Quarter 2018 Update,” Tesla Inc, May 2, 2018.)

Think about that for a minute.

Tesla burned through a huge amount of cash, yet it failed to reach its production targets of 2,500 Model 3 units per week. Instead, the company struggled to get over 2,000 units per week, only crossing that threshold near the end of the quarter.

What happened, you ask? The short answer is too much automation.

Although Musk previously boasted that Tesla’s futuristic, robot-dominated factories would slash costs and speed up production, he now admits that hiring more assembly line workers would have been a good idea. It might even have saved Tesla from having to raise additional cash.

So, Tesla’s failure to scale up production is Problem #1.

Problem #2 is a bigger, more existential threat: accidents related to self-driving technology.

Regulators are investigating four different car crashes involving Tesla’s “Autopilot” feature.

Statistically, this number is not alarming. But even if you’re bullish on self-driving technology, you have to recognize that regulators may block innovation, or worse still, that customers won’t trust their lives to autonomous vehicles.

All of this jeopardizes the vision of a utopian driverless future.

Is There Any Good News for Tesla Stock?

Yes.

Elon Musk issued a notice one week after the earnings report was released, stating that Tesla’s corporate structure will “flatten” over the next few months in an attempt to erase unnecessary levels of management and ancillary functions. (Source: “Here’s the memo Elon Musk just sent announcing a major shake-up at Tesla,” CNBC, May 14, 2018.)

I found this reassuring.

The whole point is to cut Tesla’s expenses. Musk promised analysts that Tesla won’t have to raise money this year, which would be a hard pledge to keep if the company suddenly ran short of cash. So, he’s trimming the fat wherever he can.

Oddly enough, this makes me optimistic about Tesla stock. I’ve always thought that the company’s financial health could be improved, particularly after Tesla took on SolarCity’s long-term debt. But investors were so in love with Elon Musk that he never felt the need to tighten Tesla’s belt.

Well, things have changed.

Moody’s Corporation (NYSE:MCO) downgraded Tesla’s credit rating from “Stable” to “Negative,” putting the company dangerously near junk-bond territory. On the equity side, Tesla can barely attract a strong bid right now, meaning that it can’t possibly dilute shares even further.

So, in reality, the market is doing what it always does. It’s forcing Tesla to adapt or die.

Over the next few months, we should see the carmaker shift away from automation, add more assembly workers, and scale up production of the Model 3.

If it accomplishes that while reaching generally accepted accounting principles (GAAP) profitability by December 2018, then we could see the TSLA stock price soar.

Analyst Take

It’s very hard to write about Tesla without upsetting half the Internet.

Bulls fall into a deep spiral of contempt if I suggest that Tesla’s financials are shady. Meanwhile, bears refuse to accept that Elon Musk is a true visionary with a track record of success; they continue to doubt him.

I happen to admire Musk’s commitment to bold futurism. He’s obviously done more to improve the world than I have.

But that doesn’t mean I would give him my money. Especially not when he openly says things like this: “I think that if people are concerned about volatility, they should definitely not buy our stock.” Musk added, “I’m not here to convince you to buy our stock.”

So, I suggest taking Mr. Musk at his word. If you’re concerned about volatility, maybe TSLA stock isn’t for you. But if you are willing to ride the roller-coaster, maybe the current slump is a good opportunity.